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3 Typical view of disaster recovery: Infrastructure Health Education Transportation Livelihoods Agriculture Insurance? Though insurance is purchased before disaster, its actual role is in post disaster recovery. Insurance can be effective when it is combined with reconstruction. Fisheries However, insurance has Manufacturing largely been missing from the Social capital portfolio of post-disaster recovery approaches. Community building What is limiting the potential of risk insurance in post-disaster recovery? How can Insurance be effective?

4 Can promote emphasis on risk mitigation especially when insurance is made mandatory and there is proper insurance price signal given: Insurance is largely subsidized in developing countries when present (especially in agriculture sector); In urban sector, insurance is either not mandatory or largely absent. Covers the residual risks not covered by the other risk reduction mechanisms. High basis risks could be a spoiler. Stabilizes rural incomes: reduce the adverse effects on income fluctuation and socio-economic development: Delayed payments, insufficient coverage of hazards. Reduced burden on government resources for post-disaster relief and reconstruction: Subsidization. Provides opportunities for public-private partnerships.

5 Traditional understanding of insurance effectiveness: Has the insurance delivered the contractual obligations i.e. payoffs as agreed in the contract. Affordability Firm s profitability Payoff to the insured Risks Covered

6 Affordability Most literature and experiences talks insurance effectiveness in terms of How many people are insured (Economies of scale), How to avoid moral hazard and adverse selection, Minimizing basis risk This gives an impression that the insurance will be successful if the above factors are taken care of! Firm s profitability Payoff to the insured Risks Covered How the payoffs are spent? Has there been long term reduction in risks?

8 Well being Well being Well being Vulnerable situation Resilient situation Adaptation situation Drought Drought Drought Insurance payoff From Prabhakar (ed.), 2014

9 Conceptual framework for insurance benefits IGES, 2014

10 Conceptual framework for insurance costs IGES, 2014 The message: Insurance can have both costs and benefits and net benefit in terms of long-term recovery is not always assured at the overall system level depending on how the insurance is designed

11 When it was combined with post-disaster reconstruction Combining fire and earthquake insurance with reconstruction of houses Mandatory requirement Japan, mandatory fire and earthquake insurance with right insurance price signal has led to higher emphasis on risk mitigation leading to long-term reduction in risks Right price signal Avoiding subsidies (e.g. agriculture) and instead spending on risk mitigation options

12 Appropriate insurance and contract design Multi-peril and location specific insurance approaches including weather index insurance By reducing basis risks Mandatory combination of risk mitigation and risk spreading instruments Reducing basis risks, lessening disaster losses Making female members of household the beneficiary of insurance payoff Economic empowerment and share in risk management decisions Innovative solutions such as linking savings with insurance Effectively high liquidity situation of households that can be used for nutrition, health and education